fun with numbers - wage "inflation"?

[Finster]

Re: fun with numbers - wage "inflation"?

Indeed... and definite
http://www.nowandfutures.com/grins/applause.wav too.
Its a unique look - I've never seen anything like it.

And here I'd thought you'd seen everything ...

Since you thought that was interesting, here's one more keying off the same idea. It's simply stock prices normalized for GDP. Note here we are taking the currency unit out of the equation completely - we are expressing stock prices in GDP units.

(The straight line is just the average level.)

[bart]

Re: fun with numbers - wage "inflation"?

And here I'd thought you'd seen everything ...

Since you thought that was interesting, here's one more keying off the same idea. It's simply stock prices normalized for GDP. Note here we are taking the currency unit out of the equation completely - we are expressing stock prices in GDP units.

(The straight line is just the average level.)

I wish (on having seen everything) - would that I had a lot fewer surprises.

That chart is pretty much exactly what I was thinking about to show global stocks relative under and over valuation. All you'd have to do is establish the low point as zero, the high point as 100 and shazzam - you'd have a relative global stock valuation metric that would be virtually impossible for any perma bull to argue against.
It looks like it is about 85-90% of the possible maximum now?

I'm not sure why you made the vertical scale so large though... and maybe you could do that 0-100 on the right hand scale (in linear mode... *gasp!* ;))?

[Finster]

Re: fun with numbers - wage "inflation"?

I wish (on having seen everything) - would that I had a lot fewer surprises.

That chart is pretty much exactly what I was thinking about to show global stocks relative under and over valuation. All you'd have to do is establish the low point as zero, the high point as 100 and shazzam - you'd have a relative global stock valuation metric that would be virtually impossible for any perma bull to argue against.
It looks like it is about 85-90% of the possible maximum now?

I'm not sure why you made the vertical scale so large though... and maybe you could do that 0-100 on the right hand scale (in linear mode... *gasp!* ;))?

My vertical scale and me are very tight, and I don't talk about her and she doesn't talk about me.

But as it turns out, it actually helps graphically illustrate my underlying point.

Which you have completely missed.

(eeevil laugh... )

The stock market doesn't go anywhere for long in real terms. It can't. The hint here is my remark about taking currency out of the equation. When we do that, we find that ... gasp ... the stock market doesn't go up long term. It just oscillates about a mean. Because we have inflation, however, meaning currency does engage a long term trend (down), the prices of everything measured in it ... long term ... rise.

Now that we are talking about inflation again, we have come full circle back to the topic of this thread. Have any made any statements here sufficiently outrageous to make a debate out of?

[bart]

Re: fun with numbers - wage "inflation"?

My vertical scale and me are very tight, and I don't talk about her and she doesn't talk about me.

But as it turns out, it actually helps graphically illustrate my underlying point.

Which you have completely missed.

(eeevil laugh... )

The stock market doesn't go anywhere for long in real terms. It can't. The hint here is my remark about taking currency out of the equation. When we do that, we find that ... gasp ... the stock market doesn't go up long term. It just oscillates about a mean. Because we have inflation, however, meaning currency does engage a long term trend (down), the prices of everything measured in it ... long term ... rise.

Now that we are talking about inflation again, we have come full circle back to the topic of this thread. Have any made any statements here sufficiently outrageous to make a debate out of?

Wow - that makes twice in two days I've been finned without even seeing a hint ahead of time... I wonder of that's why those guys with white coats keep trying to get in my abode? ;)

I don't know that there's much I can disagree with substantively, except perhaps a quibble on the stock market going up - but its just semantics.

I'm a bit worried about you and that vertical scale... I wonder if Dr. Laura could help?... ;)
http://www.nowandfutures.com/grins/rimshot.mp3
... and send her to me when you're done, I have this charting compulsion... ;)

[Finster]

Re: fun with numbers - wage "inflation"?

Wow - that makes twice in two days I've been finned without even seeing a hint ahead of time...

Ahhh … just a Fin Lite …

I wonder of that's why those guys with white coats keep trying to get in my abode? ;)

And here I thought the ones at my door were sent by you …

I don't know that there's much I can disagree with substantively, except perhaps a quibble on the stock market going up - but its just semantics.

So quibble, dammit … am I gonna have to go find the V man just to vent my sicko sadistic compulsions???

What?

No volunteers???

AGGHHHHH!!!!!! :eek: :eek: :eek:

;)

[jk]

Re: fun with numbers - wage "inflation"?

The stock market doesn't go anywhere for long in real terms. It can't. The hint here is my remark about taking currency out of the equation. When we do that, we find that ... gasp ... the stock market doesn't go up long term. It just oscillates about a mean. Because we have inflation, however, meaning currency does engage a long term trend (down), the prices of everything measured in it ... long term ... rise.

the stock market doesn't go up relative to gdp. gdp goes up in real terms. i.e. in terms of total widgets produced. the stock market goes up proportionately, so the stock market does go up in real terms. in other words, the stock market is a claim on the the production of the companies listed. as those companies produce more over time, the stock market is worth more over time.

[bart]

Re: fun with numbers - wage "inflation"?

So quibble, dammit … am I gonna have to go find the V man just to vent my sicko sadistic compulsions???

What?

No volunteers???

AGGHHHHH!!!!!! :eek: :eek: :eek:

;)

The quantity of logic and low emotionalism here sure doesn't give the "Fin within" much exercise... ;)

Maybe some econ board on yahoo or go give somebody on DR a cheap thrill? Vangel is probably pretty low these days and would offer little decent resistance after not only being creamed so hard this last week or so, but also pretty much overall going nowhere for a year or so.



Ok... wth... that graph would be much better in linear instead of log, and with another axis for over/under valuation data.

That view about stocks not going up long term, except as is related to gdp/capita seems a little weak since there's an implicit assumption that value per capita is a constant - and it isn't. People aren't equal in their abilities, nor do they oscillate - there must be more thana few other factors that are hidden by the over simplicity of the approach.

And besides - "the stock market doesn't go up long term" is beneath you... ;)

[EJ]

Re: fun with numbers - wage "inflation"?

To economists, the terms "inflation" and "recession" in abstract terms. Inflation is measured as the CPI, PPI, etc. Recession is measured as aggregate GDP growth. As normal, beer drinking, food eating, car driving folks, we experience "inflation" and "recession" in non-abstract ways, so we "hear" the terms differently. For example, this chart shows how we experience CPI inflation.

Depending on how much you as a person or a household spend on, say, consumer electronics, cars and clothes versus college tuitions and medical care, you are going to experience the inflation very differently, as the former are declining in real terms and the latter rising. Throw into the mix the fact that the rising cost of medical care is experienced by most individuals as rising insurance premiums, which are purchased out of income, whereas the TVs are put on the credit card, which costs rise with interest rates, and the actual experience of inflation versus the abstract CPI aggregate explains why most people think economists are full of shit.

Recession is another abstract term that used to be less abstract than it is today. When the US economy was poorly diversified as it was in the 1920s, the US was mid-way in its transformation from an agrarian to an industrial economy. When the Depression hit in the 1930s it hit all industries and geographies, so just about everyone felt it. Today you can have outright depressions in areas of the US where industries are in decline and hardly anyone else notices or care. For example, housing prices can be expected to do very badly in areas where a lot of Ford employees are about to be laid off. As anyone who lives in San Francisco can attest, if a metro area becomes highly dependent on one industry, when that industry goes through a wrenching decline, as the high tech industry did 2001 - 2004, you have a local depression, with very high rates of unemployment. IT unemployment peaked in the San Fran metro area at 26% in 2002. As bad as that was, if you were living in Ohio, you hardly noticed that anything had happened.

In addition to geographically and industry localized depressions, the Finance-based Economy, to use Bill Gross' term, adds a new form of localized depression, the zero net worth class depression. This group is comprised of middle class families who live on the edge of insolvency. They are about to get thrown into a depression, dispersed geographically across the nation – and many are already there – but the US economy as a whole will show GDP growth because there are enough families in the higher than zero net worth class, to, in aggregate, produce positive GDP growth.

There are two probems with the Finance-based Economy. One, it doesn't produce many jobs. Here's the payroll employment picture from Asha Bangalore at Northern Trust.

Two, the few jobs that the Finance-based Economy does produce are comprised of a small percentage that pay a lot or large percentage that pay a little.

The Modern Depression is a very different animal than what we are used to.

[Finster]

Re: fun with numbers - wage "inflation"?

the stock market doesn't go up relative to gdp. gdp goes up in real terms. i.e. in terms of total widgets produced. the stock market goes up proportionately, so the stock market does go up in real terms. in other words, the stock market is a claim on the the production of the companies listed. as those companies produce more over time, the stock market is worth more over time.

Ok, but why would it not be at least as legitimate to look at it the other way around? Because of advancing technology and productivity, over time it takes progressively less time to make a widget. The widget therefore gets cheaper in real terms. The value constant is the time.

Looked at that way, real per capita GDP is essentially constant, it's the widgets that are getting cheaper.

[jk]

Re: fun with numbers - wage "inflation"?

Ok, but why would it not be at least as legitimate to look at it the other way around? Because of advancing technology and productivity, over time it takes progressive less time to make a widget. The widget therefore gets cheaper in real terms. The value constant is the time.

Looked at that way, real per capita GDP is essentially constant, it's the widgets that are getting cheaper.

and as lifespan increases the unit of time is relatively smaller, so widget making as a a percentage of lifetime experience drops even more quickly! but, on the other hand, as we achieve enlightenment each minute of now is unsurpassable in value, and the cost of widget making is an expensive distraction from the all! is this silly enough? ;)

[Finster]

Re: fun with numbers - wage "inflation"?

The quantity of logic and low emotionalism here sure doesn't give the "Fin within" much exercise... ;)

Maybe some econ board on yahoo or go give somebody on DR a cheap thrill? Vangel is probably pretty low these days and would offer little decent resistance after not only being creamed so hard this last week or so, but also pretty much overall going nowhere for a year or so.

Alas, the high quality of posting here does present some challenges ...

Ok... wth... that graph would be much better in linear instead of log, and with another axis for over/under valuation data.

Okay, just for kicks, let’s see what it looks like in linear (see below).

Meanwhile, I must concede I gave your point about valuation short shrift. In fact it’s a very good one. Timely, too; there has been something of a media debate going on. The bulls claim that stocks are a good buy at these levels because PEs are quite reasonable by historical standards. The bears say nay, that earnings relative to GDP are historically high and themselves are vulnerable. How can we take both factors into account?

We plot stock prices in terms of GDP. When we do, we discover a remarkably enduring mean reversion. And we see that the argument must be settled decidely in favor of the bears, with stock prices near record highs in terms of GDP.

That view about stocks not going up long term, except as is related to gdp/capita seems a little weak since there's an implicit assumption that value per capita is a constant - and it isn't. People aren't equal in their abilities, nor do they oscillate - there must be more thana few other factors that are hidden by the over simplicity of the approach.

And besides - "the stock market doesn't go up long term" is beneath you... ;)

Yes, there is an implicit assumption that real per capita GDP is constant. Let’s make it explicit: Real per capita GDP is constant.

The usual assumption is that the unit value of goods produced is constant. Let’s turn the question around, and ask what the justification is for that assumption. Can you offer one? Surely we are not claiming that my assumption needs justification but the usual one is beyond question, right?

To get us started off, here’s a quick justification for my assumption. Over time, advances in technology and productivity result in less time needed to produce the same goods. Therefore, the goods are cheaper in real terms.

[bart]

Re: fun with numbers - wage "inflation"?

Okay, just for kicks, let’s see what it looks like in linear (see below).

Meanwhile, I must concede I gave your point about valuation short shrift. In fact it’s a very good one. Timely, too; there has been something of a media debate going on. The bulls claim that stocks are a good buy at these levels because PEs are quite reasonable by historical standards. The bears say nay, that earnings relative to GDP are historically high and themselves are vulnerable. How can we take both factors into account?

We plot stock prices in terms of GDP. When we do, we discover a remarkably enduring mean reversion. And we see that the argument must be settled decidely in favor of the bears, with stock prices near record highs in terms of GDP.

Thanks, and that sure was more of a surprise than I thought - the 2000 peak was much higher than the 1929 peak, and right now is equivalent to 1929... I'm glad I asked.

Yes, there is an implicit assumption that real per capita GDP is constant. Let’s make it explicit: Real per capita GDP is constant.

The usual assumption is that the unit value of goods produced is constant. Let’s turn the question around, and ask what the justification is for that assumption. Can you offer one? Surely we are not claiming that my assumption needs justification but the usual one is beyond question, right?

To get us started off, here’s a quick justification for my assumption. Over time, advances in technology and productivity result in less time needed to produce the same goods. Therefore, the goods are cheaper in real terms.

Of course your asumptions need justifications - you're the Finster, right? And why do I have this sneaky suspicion that I'm being set up with that last justification?...

Of course technology will help in driving down the time per produced good but it also falls apart on both high tech goods that didn't exist a year or decade ago or whatever, and on products that are not comparing apples to apples - GMO corn would be one.

And then we have something like hand made furniture or the old stand by of a custom suit from a Saville Row tailor. It doesn't seem to hold together, especially if all variables are help stable.

[Finster]

Re: fun with numbers - wage "inflation"?

Thanks, and that sure was more of a surprise than I thought - the 2000 peak was much higher than the 1929 peak, and right now is equivalent to 1929... I'm glad I asked.

Yes. FWIW, however, that's not an artifact of the linear plot, but because the overall vertical scale is more amplified. The linear plot, because it amplifies the vertical more the higher you go, merely adds to this effect.

Of course your asumptions need justifications - you're the Finster, right? And why do I have this sneaky suspicion that I'm being set up with that last justification?...

Set up??? :confused: You have evidently been paying attention to some of those Finster V Vangel debates ...

Of course technology will help in driving down the time per produced good but it also falls apart on both high tech goods that didn't exist a year or decade ago or whatever, and on products that are not comparing apples to apples - GMO corn would be one.

And then we have something like hand made furniture or the old stand by of a custom suit from a Saville Row tailor. It doesn't seem to hold together, especially if all variables are help stable.

And just like V, you are playing right into my hands. :cool: That is just the point. If we attempt to use goods as the standard of valuation, we get into a pickle real fast.

Let us, for example, assess the change in the value of the dollar by comparing the present cost of a 20-inch flat-panel display with the cost of the same item in 1922. We find that ... uhm ... ahh ... the value of the dollar has increased by a factor of approximately ... ohh ... plus infinity.

Of course, flat panel displays are not the only goods we can play hedonic tricks with. But if we average enough such goods into the overall mix, we find that we can cause the dollar to increase in value almost at will. We can make inflation practically disappear with a little statistical sleight-of-hand. You and your friends at the BLS ought to be very pleased with each other ... :eek:

Turns out that if we truly want to avoid having to make a whole series of highly suspect subjective judgments as to the presumed "value" of various goods, we cannot really come up with a broad CPI at all. The best we can do is to engage in a sort of chain-weighting where we only compare identical goods from one year to the next, relying on only those goods that are in fact identical to serve as our "stable datum".

Or, we can admit the whole enterprise is flawed from the get-go. In fact, over time the only universally traded thing that colorably stays the same and can thus serve as an unchanging standard of value is an hour of a man's time. In the aggregate and on average, would we be on more solid ground to assert that an hour of a man's time was worth the same to him in the era of Shakespeare as an hour of a man's time is to him in the era of Jerry Seinfeld - or that a 64 MB RAM chip would do better?

:confused:

[bart]

Re: fun with numbers - wage "inflation"?

Originally Posted by bart
Of course technology will help in driving down the time per produced good but it also falls apart on both high tech goods that didn't exist a year or decade ago or whatever, and on products that are not comparing apples to apples - GMO corn would be one.

And then we have something like hand made furniture or the old stand by of a custom suit from a Saville Row tailor. It doesn't seem to hold together, especially if all variables are help stable.

And just like V, you are playing right into my hands. :cool: That is just the point. If we attempt to use goods as the standard of valuation, we get into a pickle real fast.

Let us, for example, assess the change in the value of the dollar by comparing the present cost of a 20-inch flat-panel display with the cost of the same item in 1922. We find that ... uhm ... ahh ... the value of the dollar has increased by a factor of approximately ... ohh ... plus infinity.

Of course, flat panel displays are not the only goods we can play hedonic tricks with. But if we average enough such goods into the overall mix, we find that we can cause the dollar to increase in value almost at will. We can make inflation practically disappear with a little statistical sleight-of-hand. You and your friends at the BLS ought to be very pleased with each other ... :eek:

Turns out that if we truly want to avoid having to make a whole series of highly suspect subjective judgments as to the presumed "value" of various goods, we cannot really come up with a broad CPI at all. The best we can do is to engage in a sort of chain-weighting where we only compare identical goods from one year to the next, relying on only those goods that are in fact identical to serve as our "stable datum".

Or, we can admit the whole enterprise is flawed from the get-go. In fact, over time the only universally traded thing that colorably stays the same and can thus serve as an unchanging standard of value is an hour of a man's time. In the aggregate and on average, would we be on more solid ground to assert that an hour of a man's time was worth the same to him in the era of Shakespeare as an hour of a man's time is to him in the era of Jerry Seinfeld - or that a 64 MB RAM chip would do better?

:confused:

So you just used a tautology and agreement with me to fail to prove that Real per capita GDP is constant.?... hmmm... :eek: :rolleyes: (running for cage now ;))

I could submit that premium Sweet Young Things (of all ages) are the only real measure of value over times and lifetimes... ;) ... but I'll play along on that hour of time for now. Note that I'm also not conceding that a decent CPI or inflation measure or comparable basket of goods measure is impossible - but as far as one being 99%+ accurate, I do agree - there's just too many factors.
I could also reverse your flat panel display item and find some product that was available in 1922 and not now, and call that a minus infinity too.

To your real point about an hour of a man's time, pleasse go ahead and develop the point of why it is as you say. I don't think I fully understand it.






And as far as "You and your friends at the BLS", do keep in mind I have a stock of silver bullets... ;)

[Finster]

Re: fun with numbers - wage "inflation"?

And as far as "You and your friends at the BLS", do keep in mind I have a stock of silver bullets... ;)

Wooden stakes work better. (No one’s ever tried kryptonite…)

:eek:

So you just used a tautology and agreement with me to fail to prove that Real per capita GDP is constant.?... hmmm... :eek: :rolleyes: (running for cage now ;))

I could submit that premium Sweet Young Things (of all ages) are the only real measure of value over times and lifetimes... ;) ... but I'll play along on that hour of time for now. Note that I'm also not conceding that a decent CPI or inflation measure or comparable basket of goods measure is impossible - but as far as one being 99%+ accurate, I do agree - there's just too many factors.
I could also reverse your flat panel display item and find some product that was available in 1922 and not now, and call that a minus infinity too.

To your real point about an hour of a man's time, pleasse go ahead and develop the point of why it is as you say. I don't think I fully understand it.

But I’ve already given you two logical arguments. The first one was the one about the fact that the goods we use change over time, but our time itself does not. The other one was the simple fact that no justification at all has been given for the conventional tack of assuming the value of goods to be the stable datum.

So just to tally up what we have so far on both sides, we have two logical arguments in favor of my theory, and none whatsoever for the conventional view.

Given the current state of affairs, it seems to me that if I do nothing, I still come out ahead. At least until someone attempts to offer up some defense, however weak, for the conventional assumption …

:cool: